# BREAK EVEN ANALYSIS

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```					 BREAK EVEN ANALYSIS
• Any business wants to make a
profit on their investment of time
and money
• It is also a useful planning tool
• Breakeven point is the point at
which the net profit on the income
statement equals zero.
Calculating Breakeven
Three methods
• 1. cost-volume-profit
analysis
• 2. contribution analysis
• 3. sensitivity analysis
Cost –volume - profit analysis:
Three key parts are:
• fixed costs (operating expenses)
• volume (break-even point in units)
• profit (selling price minus
variable cost per unit.)
Contribution Analysis
• Calculating breakeven requires
determining how many
contributions (selling price per
unit minus variable costs per
unit) are necessary to cover, or
pay for, the product’s expected
annualized operating costs (fixed
costs)
Sensitivity Analysis
• Marketing manager changes one
of the input variables to see what
difference the change makes o
break even volume
• It shows how sensitive break
even is to changes in the
numbers used to calculate it.
Breakeven Point
• When sales equals expenses / costs
• Costs are either fixed or variable
• Variable costs tend to vary directly
with the number of units made / sold
• Fixed costs tend to be relatively
constant no matter how many units
Unit Contribution
• Unit contribution is the amount of
money remaining after the variable
one unit is subtracted from the
selling price of one unit:

Selling price per unit – variable costs
per unit = unit contribution
Total Contribution
• Total contribution is determined
by multiplying unit contributions
times the number of units sold.
Unit contribution X Number of units
sold = Total contribution
• For retailers, unit contributions is
also referred to as markup or gross
margin.
Formula

Break even     Totals fixed costs
Point      =
(in units)   selling price/ - variable cost
unit           unit
Markups
• Markup is the difference between the
cost and the desired selling price of
goods.
• Should cover the expense of operating
the business plus a desired profit
• Retail (selling) price - cost = markup
Example
•   Cost of merchandise is \$75,000
•   The Operating expenses is \$15,000
•   Desired profit is \$10,000
•   Therefore sales must be \$100,000
•   Sales    100,000
•   COGS      75,000
•   Markup     25,000
•   Expenses 15,000
•   Profit     10,000
Initial Markup
• A pair of slacks that cost \$50 is
offered for sales at \$100. What is the
markup?

• Retail Price – cost = markup
• \$100 - \$50.00 = \$50.00
Markup Percentage
Markup is usually calculated as a percentage

Markup = markup percent based on retail
Retail

Markup = markup percent based on cost
Cost
Markdowns
•  Markdowns are a reduction in selling
price
Reasons –
1. High selling prices
3. Errors in selling
4. Other markdowns reasons –eg.
season
Markdowns
• Markdowns are losses in selling
price, so the smaller the markdown
the less the loss
• Markdowns attract customers but
should occur early in the season
• Deep markdowns occur only when
necessary and losses will be large
Markdown Calculation
Dollar Markdown

1. Calculate the dollar markdown

Original retail X reduction Percent =
Dollar markdown
2. Calculate the amount of the sales
Original retail - \$ markdown = sales
(new retail)

3. Calculate the Markdown percent
based on sales

4. Markdown % = Dollar markdown
Amount sold
Example
• A furniture buyer ran a sale on
kitchen furniture. The goods had an
original retail price of \$10,000 and
were reduced for the event by \$15%.
All the goods were sold. Calculate
the markdown percent based on
sales.
1. Original price X reduction % = Markdown
dollars
\$10,000 x 15% = \$1,500
2. Calculate the amount of the sales
Org. Retail – dollar Markdown = sales
\$10,000 - \$1,500 = \$8,500
3. Calculate markdown %
4. Markdown% = Dollar markdown
Amount sold
=\$1,500 = 17.6%
\$8,500

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 views: 25 posted: 2/4/2012 language: pages: 19